Heavy losses on leveraged ETFs - sell or hold?

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brewscruise
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Heavy losses on leveraged ETFs - sell or hold?

Post by brewscruise » Tue Feb 11, 2020 4:20 pm

I currently hold 2 leveraged ETF positions at a 50% unrealized loss of about $6000 in an IRA. I have recently moved all other investments over to a roboadvisor so that I don't make the same mistakes ever again. I'm saving and investing regularly now and I want to consolidate everything so that I don't have to think about investing.

Does it make sense to sell these two losing positions, accept the loss and transfer the proceeds to the robo? Or should I wait for that mythical day when the markets will slide and my ETFs may rise in value as a result? I'm leaning towards selling/transferring proceeds.

I'm about 25 years away from retirement, slightly behind in net worth for my age but making progress with a good plan going forward (thanks in part to this forum). Realizing the $6k loss will not break my bank, but it is a bitter pill to swallow, not getting any sweeter with time.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by retired@50 » Tue Feb 11, 2020 6:52 pm

MotoTrojan wrote:
Tue Feb 11, 2020 6:08 pm
If you wouldn't buy it today (sounds like you wouldn't), then sell it.
This...^^^

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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nisiprius
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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by nisiprius » Tue Feb 11, 2020 7:12 pm

You didn't say exactly which ones you were holding. I'm no expert on these things, which don't appeal to me. Since you talk about waiting for the markets to "slide," I assume you are talking about an inverse or bear ETF.

If we look at Direxion Daily S&P 500 Bear 3X Shares ETF, SPXS, it has been destroying wealth at a rapid pace. $10,000 invested into this ETF at inception would now be worth $50.77.

At that rate of decline, the windows of opportunity in which it has been possible to make money in this particular ETF have been very short. I drew a line backward from the obvious peaks to show the time range in which an investor could have bought in at a lower price than the peak. And then of course, after buying within a shortish time window, the investor would then have had to sell close to the peak, another shortish time window.

This isn't a situation in which you can afford to wait around very long for a market dip. When you finally do get one, it might not be enough to make up for the amount you lost while waiting. These are not for investors who believe that "sooner or later a crash is coming and it may be terrific." You have to be pretty sure that the crash is going to show up pretty soon, not sooner or later.

Source

Image

As shown in green, even if you assume that the stock market loses 50% of its value tomorrow, and that as a result SPXS gains 150%, that means that the end value of $50 would jump up to $125, about the same as that peak at the end of 2018.

If you look at the chart for URPIX, one of the few leveraged inverse products for which there is a performance record for 2008-2009, the situation before 2010 doesn't look as bad. There was an opportunity to make money when the value of URPIX tripled during 2008-2009. Even there, though, to make money an investor would have needed to have good timing on the sale. It hit the peak on 2/28/2009 and it was a sharp, narrow peak. In order to get much of the benefit, you had to sell within a couple of months. That doesn't look hard in retrospect, but at the time it was by no means clear that the worst was really over. In fact people were still talking about "bear traps" and "dead cat bounces" all through the rest of 2009 and 2010.

It appears that to make much money on these things, you have to be able to hit short windows of opportunity for both the purchase and the sale.
Last edited by nisiprius on Tue Feb 11, 2020 10:00 pm, edited 2 times in total.
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nedsaid
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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by nedsaid » Tue Feb 11, 2020 7:27 pm

Gosh, equity markets are risky enough without adding leverage. What I would say is examine the reason you bought these in the first place. We have had an 11 year bull run in stocks, if you can't make money on a leveraged equity investment in this environment, then you will probably never will. Perhaps the construction of these ETFs are flawed, I would think these would be doing well.
A fool and his money are good for business.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by Dottie57 » Tue Feb 11, 2020 7:34 pm

Sell the ETFs and go with a staid, boring 3 or 2 find portfolio.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by Phineas J. Whoopee » Tue Feb 11, 2020 7:35 pm

Welcome to the forum.

What a leveraged or inverse ETF holds tomorrow will be different from what it holds today. It reconstitutes its portfolio each day markets are open, buying at the beginning and selling at the end. There is no buy and hold, conceptually. Tomorrow's leveraged ETF does not have the same portfolio as today's leveraged ETF.

[OT comment removed by admin LadyGeek]

PJW

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by MotoTrojan » Tue Feb 11, 2020 10:37 pm

nedsaid wrote:
Tue Feb 11, 2020 7:27 pm
Gosh, equity markets are risky enough without adding leverage. What I would say is examine the reason you bought these in the first place. We have had an 11 year bull run in stocks, if you can't make money on a leveraged equity investment in this environment, then you will probably never will. Perhaps the construction of these ETFs are flawed, I would think these would be doing well.
OP used an inverse/bear fund.

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Cubicle
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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by Cubicle » Tue Feb 11, 2020 10:51 pm

Welcome to the board.

Your losses are the cost of educating yourself for the future. I doubt you will make these choices again. Nothing to be ashamed of though. I suffered many losses in my early investing days.

"Boring is best." If your roboadvisor is cheap, I guess stay with them. But it is not hard to properly invest on your own. Look up "2 funds for life", "2 fund portfolio", "3 fund portfolio".

FIREmeup
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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by FIREmeup » Tue Feb 11, 2020 11:21 pm

Since you have 25 years left...be happy you had a cheap lesson this early on. Sell. Immediately and index. And in 25 years you will be happy. Most likely.. you said you are down 50%? To break even now you need a 100% gain, or a 33% move in the market. Not many times in history that has happened. If you must read Hedgefundie"s Excellent Adventure thread. There are several thousand posts to read to really understand what you are getting into.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by annu » Wed Feb 12, 2020 1:44 am

Maybe tax loss harvest with ntsx :|

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by 1789 » Wed Feb 12, 2020 2:00 am

brewscruise wrote:
Tue Feb 11, 2020 4:20 pm
I currently hold 2 leveraged ETF positions at a 50% unrealized loss of about $6000 in an IRA. I have recently moved all other investments over to a roboadvisor so that I don't make the same mistakes ever again. I'm saving and investing regularly now and I want to consolidate everything so that I don't have to think about investing.

Does it make sense to sell these two losing positions, accept the loss and transfer the proceeds to the robo? Or should I wait for that mythical day when the markets will slide and my ETFs may rise in value as a result? I'm leaning towards selling/transferring proceeds.

I'm about 25 years away from retirement, slightly behind in net worth for my age but making progress with a good plan going forward (thanks in part to this forum). Realizing the $6k loss will not break my bank, but it is a bitter pill to swallow, not getting any sweeter with time.

I wouldn't worry about losing 6k. Things happen in life. But are you confident that you would hold your emotions and not buy them again? If you say "NO" or "I don't know", then keep them until it goes to zero. That way you will (hopefully) never buy them again.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by unclescrooge » Wed Feb 12, 2020 2:48 am

brewscruise wrote:
Tue Feb 11, 2020 4:20 pm
I currently hold 2 leveraged ETF positions at a 50% unrealized loss of about $6000 in an IRA. I have recently moved all other investments over to a roboadvisor so that I don't make the same mistakes ever again. I'm saving and investing regularly now and I want to consolidate everything so that I don't have to think about investing.

Does it make sense to sell these two losing positions, accept the loss and transfer the proceeds to the robo? Or should I wait for that mythical day when the markets will slide and my ETFs may rise in value as a result? I'm leaning towards selling/transferring proceeds.

I'm about 25 years away from retirement, slightly behind in net worth for my age but making progress with a good plan going forward (thanks in part to this forum). Realizing the $6k loss will not break my bank, but it is a bitter pill to swallow, not getting any sweeter with time.
You are making a directional bet.
You were wrong.
You don't seem to have a stop loss in place, meaning you have no risk management. This leads me to believe you have no clue what you're doing.

You need to go to cash and start from scratch, else you'll be looking at 90% losses in short order.

Nothing to be ashamed of, we've all been there. Just step on the brakes before you run of the cliff.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by ivk5 » Wed Feb 12, 2020 3:04 am

annu wrote:
Wed Feb 12, 2020 1:44 am
Maybe tax loss harvest with ntsx :|
OP’s losses are apparently in an IRA, so OP will not even recover a tax benefit from this ill-conceived gamble.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by typical.investor » Wed Feb 12, 2020 3:16 am

ivk5 wrote:
Wed Feb 12, 2020 3:04 am
annu wrote:
Wed Feb 12, 2020 1:44 am
Maybe tax loss harvest with ntsx :|
OP’s losses are apparently in an IRA, so OP will not even recover a tax benefit from this ill-conceived gamble.
And isn’t the OP using an inverse fund anyway?

With the market’s tendency to rise, who’d hold one long term? Not me!

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brewscruise
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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by brewscruise » Wed Feb 12, 2020 9:25 am

Thanks for the feedback everyone - I needed this unanimous nudge to pull the trigger. I especially appreciate the responses with information about the ETFs - helpful to keep me from buying these ever again. I am reformed.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by bugleheadd » Wed Feb 12, 2020 9:25 am

if my understanding is correct - a 3x leveraged etfs would shut down if what it is tracking goes down more than 33% (in one trading session)?

and not supposed to hold long term, you can see just by expanding most leveraged etfs out 1 year, 2 years, 5 years, etc...it eventually goes down 99% (if it doesnt shut down, it keeps reverse splitting)

its good to hold for 5 minutes of day trading excitement i guess (with your fun money that yo udont care to lose of course)
Last edited by bugleheadd on Wed Feb 12, 2020 9:36 am, edited 1 time in total.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by Tamarind » Wed Feb 12, 2020 9:32 am

OP, check your prospectus for these funds. You are likely to find a statement that they are not appropriate for long holding times - very common among the leveraged ETFs as they are designed for day trading. Over long periods their tracking error becomes extreme - they can melt down. They are covered by telling you in plain language in the prospectus not to buy and hold them.

If this is the case for your funds you should sell them regardless of any other considerations.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by jabberwockOG » Wed Feb 12, 2020 9:33 am

Take the loss immediately and move on. $6k loss in the big picture and over time is trivial. Consider it tuition for a great and hopefully enduring learning experience in making investments.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by ochotona » Wed Feb 12, 2020 9:52 am

SELL
Peter W., MBA, CRPC

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by pepys » Wed Feb 12, 2020 10:18 am

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Last edited by pepys on Tue Feb 25, 2020 12:31 am, edited 1 time in total.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by MN-Investor » Wed Feb 12, 2020 10:24 am

As someone up thread said, if you wouldn't buy it today, sell it.

That's one of the best pieces of advice I've received in my years of investing. It's so easy to hang onto an owned stock which has decreased in value. You talk yourself into the idea that it must go up in value soon and so you should hang on to it. NO. The best way to analyze any investment is "Would you buy that same investment today?" If the answer is no, then sell it and put your money into what does make sense based on your current asset allocation.
The key to success - Save early, save often, invest well.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by niceguy7376 » Wed Feb 12, 2020 10:31 am

Now that you got a repetitive answer on the ETFs, what is it about the roboadvisor that interests you?

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by nedsaid » Wed Feb 12, 2020 8:25 pm

MotoTrojan wrote:
Tue Feb 11, 2020 10:37 pm
nedsaid wrote:
Tue Feb 11, 2020 7:27 pm
Gosh, equity markets are risky enough without adding leverage. What I would say is examine the reason you bought these in the first place. We have had an 11 year bull run in stocks, if you can't make money on a leveraged equity investment in this environment, then you will probably never will. Perhaps the construction of these ETFs are flawed, I would think these would be doing well.
OP used an inverse/bear fund.
Oh OK. No wonder. A bear fund ain't going to work in a raging bull market.
A fool and his money are good for business.

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by aristotelian » Wed Feb 12, 2020 8:46 pm

What was your plan going into it? If the leveraged ETF has performed within the parameters of the known risks, what has happened to make you change the plan?

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Re: Heavy losses on leveraged ETFs - sell or hold?

Post by LadyGeek » Thu Feb 13, 2020 7:47 pm

I removed an off-topic comment and several replies. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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